In a move that should offer a key economic boost to Australian small and medium enterprises (SMEs), increased regulations around borrowing are unlikely to apply to these businesses, according to reports.
The fallout from the Royal Commission inquiry into financial misconduct has resulted in suggestions of sweeping changes in the lending sector, particularly concerning the practice of handing out interest-only loans that consumers are unable to pay back.
Because the introduction of too many regulations could have a serious effect on SMEs trying to raise and keep steady flows of capital, they should not need to worry about facing stricter loan obligations.
In his interim report, Commissioner Kenneth Hayne said that when looking at “evidence and submissions”, he did not discover “any great appetite to change the legal framework.” This will be positive news for SMEs that are concerned about no longer having the same access to capital funding that they did previously.
Hayne also said that he did not find any “substantial support for changing the legal framework in ways that would bring some or all SMEs within the application of the NCCP Act.” This refers to the National Consumer Credit Protection Act, which looks to protect the average household from accessing credit for mortgages that they cannot make payments on.
While the Commission’s report revealed many problems in lending that could have easily precipitated an economic breakdown from a crash in the market, Hayne seemed confident that the same issues did not spread to lending to SMEs, which operate in a different market and compete for different types of funding.
In particular, Hayne highlighted just how necessary it is for SMEs to be able to access these streams of increased liquidity for their businesses, citing “the central and perhaps irreplaceable role played by guarantors in securing small business finance.” He also mentioned the specific “vulnerability of small businesses to failure.”
Although the report made it clear that action is necessary to improve current lending practices and some new regulations are likely to occur, this process should take place in stages so as to not cause serious economic problems for those currently relying on access to credit. Sudden and drastic alterations could result in more harm than good and lead to instances of funds being inaccessible because of strict regulations that leave banks unsure of their lending strategies.
While Royal Commission Senior Counsel Michael Hodge QC noted that the connections between banks and business borrowers are “almost always complicated,” he added that it is important to be aware of just how these relationships are “intertwined with the operations of the business and often also the personal financial situation of the individual or individuals behind the business.”
The Commission’s report looked at several factors when presenting its interim thoughts about actions needed in the financial sector. It discussed consumer and business lending as well as financing for the farming and Indigenous sectors.
The key aim of the inquiry is not only to call lenders into question but also to take steps to eradicate the behavior that led to many of these financial problems over the last decade.